R v Investors Compensation Scheme Ltd, Ex parte Taylor (Taylor, Ex parte)

The statutory compensation scheme turns on the civil liability claimed, not simply on when the underlying loss first occurred. A transaction entered into after 18 December 1986 may generate a compensatable claim even where it follows, and overlaps with, an earlier transaction and loss. The court must analyse the later transaction, its legal effects and the loss said to flow from it under ordinary civil law. A bona fide contract may arise from surrender of an earlier right and agreement to leave the balance invested, despite the fraudster’s lack of honest intention. Contract and deceit claims arising from the later transaction were separate liabilities. No public policy rule barred damages merely because the defendant might have paid from funds obtained from others. The claim was eligible under the Financial Services (Compensation of Investors) Rules 1990.

Mr Taylor appealed against the Divisional Court’s dismissal, on 29 November 1996, of his application for judicial review. He had invested money with Beechcroft Insurance Brokers before the compensation scheme commenced. After the investment had been misappropriated without his knowledge, he entered into a further transaction in 1991, leaving most of the amount represented as due to him with Beechcroft on new terms.

Investors Compensation Scheme Ltd accepted that the later advice could give rise to breach of contract and misrepresentation, but refused compensation on the ground that no fresh loss had occurred and that the claim was in substance for the pre-commencement misappropriation. The central issue was whether the 1991 transaction created a separate civil liability incurred after the relevant commencement date and within the statutory scheme.

Lord Justice Potter delivered the judgment of the court. The appeal was allowed, the relief sought was granted, and the application was allowed with costs here and below.

1. The court construed section 54 of the Financial Services Act 1986 and Rule 1.02.3 of the Financial Services (Compensation of Investors) Rules 1990 by reference to the civil liability for which compensation was claimed. The provisions were directed to claims enforceable in the civil courts, whether for recovery of property or damages. They were not directed merely to the date on which the claimant first suffered loss.
2. A pre-commencement investment and liability did not necessarily prevent compensation for a later transaction giving rise to a different and separate civil liability after 18 December 1986. It was no answer that the claimant could previously have sued the same person for a similar or substantially similar loss. Rule 2.04(2) reinforced the need to examine whether the particular claim would be established before a court of competent jurisdiction.
3. The 1991 transaction was legally real, not merely fictional. Mr Taylor surrendered his rights under the earlier investment in return for payment of £2,000 and a new agreement concerning the balance. His forbearance supplied consideration, and a valid contract could arise even though Mr Barrett intended to deceive him. The contractual relationship was one of debtor and creditor, not trustee and beneficiary. The later contract and deceit claims therefore differed in time, legal source and measure of damage from the earlier liability.
4. The court rejected the public policy argument. No authority or principle justified refusing damages, or scheme compensation, because the defaulting firm might have paid the claimant from funds obtained from other investors.
5. On the evidence, ICS could be satisfied under Rule 2.02(2)(b) that Mr Taylor had a claim against a defaulting participant firm which was a Scheme Business claim under Rule 2.03(1). The court referred to R v Investors Compensation Scheme ex parte Weyell and Veniard as illustrating the need for an analytical examination of characterisation and causation.

The order allowed the application with costs, provided for legal aid taxation of the applicant’s costs, and refused leave to appeal to the House of Lords.

• Court of Appeal — On 4 December 1997, the court allowed the appeal and granted relief. The application was allowed with costs here and below: [1997] EWCA Civ 2904.
• Divisional Court — On 29 November 1996, the court dismissed Mr Taylor’s application for judicial review of ICS’s refusal to treat his claim as eligible under the compensation scheme.